BLM proposes higher onshore oil, gas royalty rates

The US Bureau of Land Management is proposing changes to federal onshore oil and gas royalty rates, rental payments, lease sale minimum bids, civil penalty caps, and financial assurances, US Interior Secretary Sally Jewell announced. Comments on the Advanced Notice of Possible Rulemaking (ANPR) will be accepted for 45 days following its publication in the Federal Register next week.

“It’s time to have a candid conversation about whether the American taxpayer is getting the right return for the development of oil and gas resources on public lands,” Jewell said.

She said modernizing the agency’s flexibility, especially given the dramatic growth of oil development on public and tribal lands, where production has increased in each of the past 6 years, and combined production in 2014 was 81% higher than in 2008.

Changing BLM’s regulations also would respond to concerns the Government Accountability Office, the US Department of the Interior’s Office of Inspector General, and others have expressed regarding BLM’s rules that lack the flexibility to offer new competitive leases at higher royalty rates, Jewell said.

DOI and BLM are analyzing the costs of doing business on federal lands, noted Janice Schneider, assistant Interior secretary for land and minerals management. “We also want to ensure those resources are developed diligently and responsibly and that financial assurances and penalties reflect the true costs of modern day oil and gas development and reclamation,” she said.

Idea immediately questioned

But American Petroleum Institute and Independent Petroleum Association of America officials quickly questioned whether federal onshore oil and gas rate increases are justified or necessary.

“Despite the renaissance on state and private lands, energy production on federal lands has fallen, and yet another set of costly changes to federal rules could drive more economic development and job creation off public lands,” API Upstream Group Director Erik Milito said.

He said, “Clear, consistent leasing and royalty terms are part of what makes investments possible, so preserving certainty in the process is critical for the consumers and workers that benefit from domestic production.”

At a time when crude oil prices have dropped 50% over the past 7 months, and coupled with new federal regulations for onshore producers, the Obama administration’s proposal to increase onshore royalty rates would ultimately result in fewer American jobs, reduce energy production, and hurt the country’s energy security, warned Daniel T. Naatz, IPAA’s vice-president of federal resources and political affairs.

“Simply put, raising fees on America’s independent producers—companies with an average of just 12 employees—will cause small, family-owned businesses to suffer and further discourage energy development on federal lands owned by US taxpayers,” he said.

Current requirements

DOI said the royalty rate for competitive oil and gas leases on federal lands is 12.5% of the value of production. The current regulation locks that rate at the minimum allowed by law, even though many states and private landowners assess higher rates to oil and gas developed on their lands.

The ANPR seeks comments on potential changes that would provide the BLM with the procedural flexibility to change the royalty rate in response to market conditions consistent with the procedure for offshore oil and gas leases.

The ANPR notice also seeks comments on whether existing bonding requirements and civil penalties are adequate.

The current minimum bond amounts—$10,000 for a lease-wide bond, $25,000 for a statewide bond, and $150,000 for a nationwide bond—have not been updated in two generations, DOI said. The current lease-wide amount reflects a small fraction—one fifth of one percent—of the average cost of drilling a modern well and may not adequately reflect the potential cost to taxpayers should a company fail to comply with lease terms, it said.

Existing rules that cap civil penalties that BLM can assess may be at levels too low to sufficiently deter potential violations, DOI said.

Eisenhower-era rates

“Today’s bonding rates were set when Dwight D. Eisenhower was president. We are long overdue to consider an update that will help us ensure that oil and gas sites are properly managed and reclaimed and that taxpayers aren’t left picking up the tab,” said BLM Director Neil Kornze.

The ANPR also seeks comments on how BLM might update its rules regarding the minimum acceptable bid that must be paid by parties seeking a lease at auction, and the annual rental payments that are due once a lease is obtained.

DOI said the current minimum acceptable auction bid is $2/acre, well below the rate at which most parcels sell, which suggests that the rate could be higher.

After obtaining a lease, a lessee now is required to make annual rental payments until the lease starts producing oil or gas. These rental rates currently are $1.50/acre for the first 5 years and $2/acre for years 5 through 10.

Contact Nick Snow at nicks@pennwell.com.

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